AML/CTF COMPLIANCE FOR FINANCIAL SERVICES

Banks, Building Societies and Credit Unions provide products and services to personal and business customers.

These offer a range of products and services from the provision of basic bank account facilities, saving and investment products, and loan and credit products through to complex products for commercial business customers.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the banking sector include:

• There is a high risk that the proceeds of crime will pass through banking accounts at all stages of the money laundering process
• The provision of account/transaction products and services to cash-generating businesses is a particular area of risk
• Lending where there is an acceleration of an agreed repayment schedule, either by means of lump sum repayments, or early termination
• Loans are made in one jurisdiction, and collateral is held in another

Banking businesses captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.

Digital currency can mean a digital representation of either virtual currency or e-money and thus is often used interchangeably with the term “virtual currency”.

Decentralised, math-based virtual currencies have attracted increasing attention from an AML/CTF perspective because digital currencies are considered by some to be the future for payment systems.

Digital currencies may also provide a powerful tool for criminals, terrorist financiers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the digital currency sector include:

• Convertible virtual currencies that can be exchanged for real money or other virtual currencies
• Greater possible anonymity than traditional non-cash payment methods
• Virtual currency systems can be traded on the Internet, and are generally characterised by non-face-to-face customer relationships
• Permit anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the funding source)
• Permit anonymous transfers, if sender and recipient are not adequately identified

Digital currencies businesses captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws

Financial planners and advisers give customers advice on their investment needs (typically for long-term savings and pension provision) and selecting the appropriate products.

Financial planners and advisers either only give advice or they act on behalf of their customers in dealing with a product provider.

The typical customers of financial planners and advisers are personal clients (including high net worth individuals), trusts and companies.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the financial planning sector include:

• Criminals may seek to conduct their financial activity through a planner or adviser to disguise their involvement
• Criminals may seek out planners and advisers as gatekeepers to the financial system to give the impression of respectability and legitimacy
• Criminals may seek the assistance of planners and advisers to obscure who really owns or controls the funds and assets (that is, the beneficial owner)

Financial planners and advisers captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.

Investment management includes both discretionary and advisory management of segregated portfolios of assets (securities, derivatives, cash, property etc.)

Discretionary managers are given powers to decide upon stock selection and to undertake transactions within the portfolio as necessary, according to an investment mandate agreed between the firm and the customer.

Advisory relationships differ in that, having determined the appropriate stock selection, the manager has no power to deal without the customer’s authority. In some cases, the customer will execute their own transactions in light of the manager’s advice.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the investment management industry include:

• Funds (incoming and outgoing) maybe handled by a third party, such as a custodian or administrator
• Unexpected inflows/outflows of Third party payments
• Use of offshore trusts and companies as investment vehicles by customers
• PEPs and customers from higher risk jurisdictions

Investment managers captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.

Stockbrokers carry out transactions in securities with market counterparties, as agents for customers.

Some stockbrokers deal with high volumes of low value customer transactions, whereas others direct their services towards higher net worth customers, and thus have fewer customers.

Whilst stockbroking might be regarded as being of lower risk compared to many financial products and services, the risk is not as low as in providing investment management services to the same types of customer from similar jurisdictions.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the stockbroking sector include:

• Stockbroking customers may adopt a variety of trading patterns making the identification of unusual behaviour difficult
• Customers can quickly buy and sell in the markets which may create breaks in the audit trail
• The firm is offering no advice and may have little or no knowledge of a particular customer’s motives
• Customers are also free to spread their activities across a variety of brokers for perfectly valid reasons, and often do. Each broker may therefore actually have little in terms of transaction history from which to identify unusual behaviour
• Many firms provide stockbroking services on a non- face-to-face basis, including via the internet

Stockbrokers captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.

Superannuation and pension products and services present various levels of vulnerability. Lower risk products include eligible rollover funds and defined benefits funds where they do not allow members to make contributions.

Higher risk products include accumulation funds and post-preservation accounts, which allow relatively easier movement of funds.

However, specific characteristics make the sector vulnerable to ML/TF and predicate crimes.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the superannuation and pension fund industry include:

• Extremely large number of member accounts and volume of transactions
• Low levels of member engagement
• Voluntary contributions to accumulation accounts by members, where the source of money is difficult to verify
• Payments to members and outgoing rollovers that are vulnerable to fraud and illegal early release
• A growing reliance on online delivery of products and services, resulting in less face-to face interaction with customers
• The use of third parties and intermediaries

Superannuation and pension funds captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.

Wealth or asset management is the provision of banking and investment services in a closely managed relationship to high net worth clients.

Services will include bespoke services tailored to a client’s needs and may be provided through a range of products available to the client.

The availability of complex products and services that operate internationally within a reputable and secure wealth management environment that is familiar with high value transactions is attractive to money launderers and other criminals.

The Money Laundering and Terrorist Financing (ML/TF) risks associated with the wealth and asset management industry include:

• Wealthy and powerful clients may be reluctant or unwilling to provide adequate documents, details and explanations
• Clients often have many accounts in more than one jurisdiction, either within the same firm or group, or with different firms
• The transmission of funds and other assets by private clients often involve high value transactions, requiring rapid transfers to be made across accounts in different countries and regions of the world

Wealth and asset management businesses captured by the AML/CTF obligations must ensure the organisation conducts a comprehensive ML/TF risk assessment to identify, assess, mitigate and manage ML/TF risk exposures. This is a critical first step in complying with AML/CTF laws.